Tether, the issuer of the popular stablecoin USDT, and Circle, the issuer of the USD Coin (USDC), dominate the stablecoin market. A stablecoin is a type of cryptocurrency typically pegged to the US dollar. A team of New York State's top prosecutors has issued a warning regarding the Clarity Act, a landmark piece of cryptocurrency industry legislation, alleging that the bill fails to protect fraud victims and provides legal cover for companies that "profit from fraud." A letter obtained exclusively by CNN, jointly signed by New York Attorney General Letitia James, Manhattan District Attorney Alvin Bragg, and three other district attorneys, states that the bill grants "legitimate recognition" to cryptocurrencies like stablecoins, yet allows their issuers to "circumvent crucial regulatory requirements needed to combat terrorist financing, drug trafficking, money laundering, and particularly cryptocurrency fraud." The Clarity Act, a bill with broad bipartisan support signed into law this past July, aims to establish a regulatory framework for stablecoins. These digital assets have seen explosive growth in popularity within a largely unregulated digital asset market. The bill sets reserve requirements for stablecoin issuers, rules similar to those ensuring banks hold sufficient assets to cover liabilities, mandating that issuers must fully back their digital tokens 1:1 with liquid assets like US dollars and short-term US Treasury securities. However, James and Bragg strongly oppose a critical omission in the Clarity Act—the bill does not include provisions forcing companies to return stolen funds to fraud victims. This omission, the prosecutors wrote in the letter, "would embolden, and even provide legal cover for, stablecoin issuers to brazenly decide to withhold stolen funds and proceeds under their control rather than return them to victims." The prosecutors allege that the two leading stablecoin issuers—Tether and Circle—are already profiting from the rampant criminal activity in the stablecoin market while impeding law enforcement's efforts to seize and return victims' funds. The letter points out that Tether, as the largest stablecoin issuer by trading volume, has the capability to freeze suspicious Tether transactions but only does so temporarily and in coordination with federal law enforcement actions. "As a result, for many victims, funds stolen in or converted to Tether can never be frozen, seized, or recovered," the letter states. "Tether currently makes case-by-case decisions about whether to assist law enforcement in recovering funds for victims, and there is nothing to prevent it from ceasing reissuance of Tether altogether." Tether provided a statement to CNN, saying the company "takes fraud, consumer harm, and the misuse of Tether extremely seriously and maintains a zero-tolerance policy toward illegal activity." The El Salvador-based company stated it "does not have the same comprehensive legal obligation to comply with state-level civil or criminal judicial processes as a US-regulated financial institution would. Nevertheless, Tether voluntarily works closely with US law enforcement at the federal, state, and local levels and regularly assists in investigations aimed at protecting victims and preventing further harm." The prosecutors accused the second-largest issuer, Circle—a publicly traded company headquartered in New York that "portrays itself as an ally in the fight against financial fraud"—of having policies that are "far worse for fraud victims than Tether's." Even when Circle agrees to freeze funds, the prosecutors said, it withholds the funds instead of returning them to victims and earns interest on these underlying assets. This practice gives Circle an "obvious" financial incentive to deny law enforcement requests, according to the prosecutors. "It is more economically advantageous for Circle to merely freeze the cryptocurrency deemed stolen without returning the underlying assets to law enforcement or any fraud victim, as the company can continue earning interest by investing the underlying funds." Dante Disparte, Circle's Chief Strategy Officer, told CNN in a statement that the company "prioritizes financial integrity and is committed to advancing robust stablecoin regulatory standards in the US and globally." Disparte said the Clarity Act "explicitly requires stablecoin issuers to comply with financial integrity rules combating illicit activity, while enhancing clear consumer protection guidelines. As a US-regulated financial institution, we have always followed the rules in place and will continue to help advance these standards." The letter, verified by CNN, represents one of the strongest criticisms of the act by law enforcement officials since President Trump signed it into law in July. Despite its broad bipartisan support, critics argue it lacks sufficient consumer protections and creates a serious risk of cryptocurrency volatility spilling into the mainstream financial system. Meanwhile, another landmark regulatory bill backed by the cryptocurrency industry is advancing through Congress. Supporters, including large cryptocurrency firms that lobbied for the bill's passage, have hailed the Clarity Act as a significant step toward the industry's regulatory goal—establishing, in President Trump's words, a "clear, concise regulatory framework" for stablecoins, which have become the lifeblood of the cryptocurrency ecosystem. The prosecutors' joint letter was sent to Democratic Senators Chuck Schumer and Kirsten Gillibrand—key Democratic supporters of the Clarity Act in the Senate—as well as Mark Warner, who sits on the Intelligence and Banking Committees. Schumer and Gillibrand did not immediately respond to requests for comment. A spokesperson for Warner issued a statement saying, "Under the Clarity Act, stablecoin issuers have a responsibility to comply with lawful court orders and fully cooperate with law enforcement to help victims recover stolen funds... Protecting victims is paramount, and Congress continues to assess whether additional legislation is needed to ensure issuers and law enforcement can act swiftly to stop criminal activity and return stolen funds to their rightful owners." When the bill passed the Senate in June, Gillibrand praised it for its potential to "allow American businesses and consumers to capitalize on the next generation of financial innovation." As the name implies, stablecoins maintain a stable value by being pegged to another asset, typically the US dollar, with one stablecoin generally being equivalent to one dollar. This feature is crucial for investors who wish to keep funds within the cryptocurrency ecosystem without exposing their assets to the wild price swings of tokens like Bitcoin or Ethereum. Stablecoins are also seen as a bridge between the cryptocurrency market and the mainstream financial system, two realms that previously had little overlap. According to Bloomberg, citing data from Artemis Analytics, the total transaction volume for stablecoins surged 72% in 2025 to reach $33 trillion. Although Bitcoin remains the most popular crypto token, its trading volume has been surpassed by dollar-pegged stablecoins. Data from cryptocurrency research firm Chainalysis shows that stablecoins, with their combination of relative stability and transactional anonymity, are also favored by criminals, facilitating 63% of all illicit transactions in the cryptocurrency space. Despite the cryptocurrency industry's attempts to distance itself from long-standing associations with scams, cybercrime, drug trafficking, and money laundering, criminal problems persist. Chainalysis estimates that illegal activity on the blockchain—the core infrastructure of cryptocurrency—has grown by an average of 25% annually since 2020. A recent report from the International Consortium of Investigative Journalists found that over the past two years, thieves and scammers have moved approximately $28 billion through major, well-known cryptocurrency exchanges globally. The New York prosecutors stated they are "actively investigating criminal networks using stablecoins for cryptocurrency fraud and money laundering" and attempting to "freeze and seize" stolen funds to return them to victims. However, the prosecutors argue that the Clarity Act hinders these law enforcement efforts and emboldens stablecoin issuers to resist returning stolen funds to victims. "Unlike any other cryptocurrency," the letter states, "Circle and Tether have the ability to freeze stablecoins and 'instantly stop the flow of stolen funds and criminal proceeds.'" Yet, the prosecutors noted, "Tether provides assistance only in limited circumstances, while Circle chooses to actively obstruct law enforcement and profit from victims' losses." The prosecutors estimate that in 2024, Circle and Tether each earned approximately $1 billion by investing their reserves, which include reserves backing stolen and frozen stablecoins. They claim that as of November 2025, Circle held over $114 million in frozen funds. For critics of cryptocurrency, the Clarity Act's lack of anti-fraud and fund-return provisions reflects a persistent industry-wide problem—the absence of even the most basic consumer protections. Hilary J. Allen, a law professor at American University specializing in banking and cryptocurrency, told CNN, "The basic regulatory rules that the traditional financial industry developed over decades of trial and error are absent from the Clarity Act. The cryptocurrency industry could have operated under the rules of traditional finance... These laws were never in conflict with the cryptography; the conflict is between these laws and the cryptocurrency industry's business model."